Eurobond Market

The second major sector of the unregulated capital market is the Eurobond market. The Eurobond market is characterized by direct transaction between borrowers and lenders, although the large banks play a major role in underwriting and placing the bonds. The market permits lenders to lend directly to borrowers across national borders, without the intermediation of a bank. Bank can, however, plays a major role in arranging the transaction. Eurobonds differ from foreign bonds in that the latter are issued in one country in its currency by a foreign borrower. By contrast, the Eurobond is issued in one currency such US $, the yen, the pound, the mark or the Swiss franc for sale in many capital markets with the sale managed by an international syndicate of bank Underwriters.

The borrowers or issuers of the bonds include public sector organizations and commercial banks, established blue chip companies. The lenders or purchasers of the bond securities are individual and institutional investors, with the latter group dominating. A secondary market for Eurobonds has grown rapidly as these financial institutions continuously seek to adjust their portfolios, and as a result the original lenders are not committed to a borrower until the final maturity of the bond issue.

Generally, purchasers buy Eurobonds in currencies other than their own, and a major attraction of these bonds for individuals is that in most currencies they are exempt from withholding taxes. Furthermore, the unregulated nature of the market means that its costs are lower and its issuing process is much faster domestic or foreign bond counter parts. These bonds market provide a wide variety of medium to funds of 3 to 15 years maturity. Fixed coupons or interest rates are common but floating rate notes are also important.

The Eurobond market is the market for long-term debt instruments issued and traded in the offshore market. Like the Eurocurrency market, the necessary condition for the development of a Eurobond market is differences in national regulations. Increasing capital mobility and greater ease in telecommunications have provided the sufficient conditions, allowing the Eurobond market to flourish.

A Eurobond is usually denominated in a currency (or unit of account) that is foreign to a large number of buyers. A domestic bond is an obligation of a domestic issuer that is underwritten by a syndicate of domestic investment banks, denominated in domestic currency, and offered for sale in the domestic market.

Features of Eurobonds Issue

The distinctive features of Eurobonds issues are as follows:

• The issue of Eurobonds is in the form ‘ placing’ rather than formal issuing, to avoid national regulations on new issues .
• Eurobonds are placed simultaneously in many countries through multinational syndicates of underwriting banks who sell them to an investment clientele throughout the world.
• Euro bonds are sold principally in countries other than the country of issue.
• The interest on Eurobonds is not subject to withholding tax, which is an advantage over domestic bonds owned by nonresidents, on which tax deduction is made before interest is paid.